By Jamie McGeever
ORLANDO, Florida (Reuters) – Of all the economic and market curve balls investors have had to bat away this year, few will be as unexpected as the U.S. economy growing faster than China’s.
This was not how the 2023 consensus looked in January, when China was poised to break out of its COVID lockdown like a coiled spring, and the United States would buckle under the Fed’s most intense rate-hiking cycle in 40 years and slip into recession.
But China is struggling to get off the ground, and the narrative around the U.S. economy is shifting, remarkably, away from a ‘soft landing’ towards a ‘no landing’ scenario.
The contrast in the fortunes of the world’s two economic superpowers has been extraordinary, perhaps the starkest reminder that investors’ priors, rules of thumb and models have been completely ripped up by the pandemic.
China’s economy grew by just 0.8% in the second quarter from the prior three months, down from 2.2% in a first quarter that was inflated by base effects as activity resumed after lockdown restrictions were lifted in December.
The U.S. economy expanded 1.2% in the second quarter, following 1.6% growth in the first three months of the year. Hardly gangbusters, but more than comparable to a rival that should have been powering ahead.
There’s little to suggest the economic dynamics are about to reverse any time soon, while tensions between the two powers over tech and cyber security, espionage and trade remain heated.
According to the Atlanta Fed’s GDPNow real-time growth tracker, the U.S. economy is set to expand at a 5.8% annualized rate in the third quarter, which would be more than double the rate of annualized growth in the first and second quarters.
Meanwhile, China’s growth outlook continues to darken. Economists at Barclays (LON:) just cut their third and fourth quarter GDP growth forecasts to 2.8% from 4.9% on a quarterly basis, and lowered their 2023 call to 4.5% from 4.9%.
That’s comfortably below the Chinese government’s full-year target of around 5%, a goal an increasing number of analysts think will be missed.
China’s potential growth over the coming years is around double that of the United States, but there must be growing doubt about when China’s GDP will surpass that of the U.S..
Analysts at Goldman Sachs still reckon it will be in 2035 but Desmond Lachman, a senior fellow at the American Enterprise Institute, told Reuters recently that it probably won’t happen for at least 20 years.
TALE OF TWO LANDINGS
Ilaria Mazzocco, senior fellow with the Trustee Chair in Chinese Business and Economics at the Center for Strategic and International Studies, says China is resilient and any talk of an economic collapse is far-fetched.
But the era of double-digit and even high single-digit growth is over, and concerns over China’s weaknesses have proven to be well-founded.
“There was a lot of talk in the last decade or so about China’s rise and America’s decline. What we’re seeing now is a reversal of that discourse” she said.
“We may see similar growth rates between the U.S. and China, which is a concern for China because it is much poorer per capita,” she added.
China’s GDP per capita last year was $12,720, according to the World Bank, six times smaller than the U.S. equivalent of almost $76,000.
There’s a danger that the current narrative – U.S. optimism and Chinese pessimism – gets overblown. The historic highs and lows of U.S. and Chinese economic surprises, respectively, will likely revert to mean as analysts adjust their expectations.
The ‘long and variable lags’ of 525 bps of Fed tightening have yet to fully hit the U.S. economy, and the highest bond yields since around the time of the Great Financial Crisis could choke Wall Street and Main Street later this year.
Equally, authorities in Beijing could surprise markets and revive the economy with major monetary and fiscal stimulus. They’ve done it before.
But there are good reasons why investors have pulled huge sums out of Chinese markets this year, why the gap between 10-year U.S. and Chinese bond yields is the widest since 2007, and why the yuan is also close to its weakest level since 2007.
Deflation, record youth unemployment, an imploding property sector, historically low bank lending and plunging trade with the rest of the world are problems that are unlikely to be fixed quickly.
“With this string of data disappointments, markets are likely to remain worried over prospects of a China hard landing,” Dirk Willer and his emerging market colleagues at Citi wrote this week.
(The opinions expressed here are those of the author, a columnist for Reuters.)
(By Jamie McGeever; Editing by Kirsten Donovan)